Scripps Avoids the Sharks
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Scripps Networks Interactive (NYSE: SNI) undoubtedly disappointed a few M&A players when it announced last year its authorization of a large-scale share buyback of $1 billion, with the apparent aim of keeping the bulk of its ownership in-house. The buyback was a big move given that the company only had $794 million in cash at the end of the quarter before the announcement was made. SNI must really be determined to keep control, since total market cap for its common shares stands at around $6.9 billion.
Scuttlebutt is, the move was made to fend off acquisitive rivals. If so, that'll disappoint not only those potential acquirers, but investors who put money into the firm on the expectation its shares would increase on the back of a takeover. Scripps isn't the juiciest of targets but it's a good performer nonetheless. It has the majority or entirety of specialty TV cable channels like the Food Network, HGTV and The Travel Channel and related internet properties, and keeps its operations fairly lean and tight. Net profitability has been hovering around the 19% range in recent fiscal years, a good number considering the vagaries of the cable TV business and the niche offerings of the company.
For the most part SNI seems to be a careful, deliberate operator, which made its bonanza buyback seem a little out of character. It strongly suggests the company was deeply worried about being swallowed by the sharks, as consolidation in the TV biz has been rife these past few years and potential Big Fish like Cox Communications are still hungry to expand their business.
So the likelihood of Scripps getting swallowed seems to have faded. Since it's apparently no longer a takeover play, is it worth buying on fundamentals? Prior to the buyback it was. In addition to the above-mentioned 19% net margins, the company was expected to post earnings growth of 33% over the next two fiscal years. It also paid a dividend, although this was low compared to some of its larger competitors like Time Warner. Which is probably a moot point now, thanks to that cash-eating buyback.
It remains the chief concern about SNI stock. Any company more worried about survival than growing short- to medium-term results tends to take a share price hit during its batten-down-the-hatches period. To no one's surprise, SNI stock dropped 19 cents the day the buyback was announced, and has since shed over $5 more to end in the mid-40s. There's no fundamental indication it will go substantially higher in the foreseeable future.
The good news is, there are numerous alternative media plays of various shapes and sizes for investors to put money in. One stock with a nonfiction TV channel profile not unlike SNI's is Discovery Communications (NASDAQ: DISCA), although it's a risky play right now given the hundreds of millions of dollars the company has sunk into the underperforming Oprah Winfrey Network. Scaling up a bit, large Viacom (NASDAQ: VIAB) has had some recent success with its movie offerings, balancing this nicely with a host of popular TV properties that bring in more predictable revenue streams. Also, in terms of yield its dividend is twice that of Scripps' current offering. Time Warner Cable (NYSE: TWX) is as blue chip as media stocks get, but it's more sprawling and clunky then Viacom and its profitability growth is expected to be half as much as its smaller rival.
So for the moment, Scripps is probably a hold or a sell. There are other media plays out there, and they're bigger and less likely to end up in the jaws of a predator anytime soon.
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